Question 1

Which of the following statements about the tax treatment of gifts of capital assets is NOT correct?

Accepted Answer

The tax treatment of gifts is not different based on whether the gift is made to an arm's length or non-arm's length party. The tax implications for the giver and recipient are the same in both situations.

Question 2

A dining room suite that had been purchased for $700 was sold during the year. The proceeds of disposition totalled $500. The allowable capital loss on the transaction is $100.

Accepted Answer

The allowable capital loss is calculated as the difference between the purchase price and the sale price, which in this case is $700 - $500 = $200, not $100.

Question 3

Which of the following is NOT included in ITA 53 as an adjustment to the cost base of an asset?

Accepted Answer

ITA 53 includes government assistance, superficial losses, and interest and property taxes as adjustments to the cost base of an asset. However, CCA taken in previous years is not included as an adjustment.

Question 4

A dining room suite that had been purchased for $700 was sold during the year. The proceeds of disposition totalled $1,500. The taxable capital gain on the transaction is $250.

Accepted Answer

To calculate the taxable capital gain, we subtract the adjusted cost base ($700) from the proceeds of disposition ($1,500) to get a capital gain of $800. We then multiply this by the inclusion rate of 50% to get a taxable capital gain of $400. Therefore, the statement in the question is false and the correct answer is B.

Question 5

When an individual emigrates from Canada, there is a deemed disposition of all of his capital property at fair market value.

Accepted Answer

The answer of When an individual emigrates from Canada, there...

Question 6

Which of the following statements with respect to capital gains is NOT correct?

Accepted Answer

The lifetime capital gains deduction does not reduce the amount of capital gains included in Net Income For Tax Purposes. Instead, it directly reduces the taxable capital gain, which is a different concept. Net Income For Tax Purposes includes the full amount of the capital gain before any deductions like the lifetime capital gains deduction are applied.

Question 7

Losses on the disposition of listed personal property can be deducted, but only against gains on the disposition of listed personal property.

Accepted Answer

According to the IRS, losses on the disposition of listed personal property can be deducted, but only against gains on the disposition of listed personal property.

Question 8

A dining room suite that had been purchased for $700 was sold during the year. The proceeds of disposition totalled $900. The capital gain on the transaction is $200.

Accepted Answer

The answer of A dining room suite that had been...

Question 9

Which of the following statements with respect to capital gains is correct?

Accepted Answer

The favourable taxation of capital gains is designed to partially compensate businesses for the effects of inflation. This is because capital gains are only taxed on the increase in real value of an asset, instead of the nominal value, which could be subject to inflation. The inclusion rate for taxable capital gains has not always been one-half and varies depending on the type of capital gain and the year it was realized. While most gains on the sale of Canadian securities are treated as capital gains, there are exceptions. The lifetime capital gains deduction is still available to Canadian individuals, but the amount has been reduced over the years.

Question 10

Capital gains on a principal residence are not taxable.

Accepted Answer

In the United States, capital gains on a principal residence are generally taxable, but individuals can exclude up to $250,000 of the gain from their income ($500,000 for married couples filing jointly) if they meet certain criteria, such as owning and using the home as their principal residence for at least two of the five years before the sale.

Question 11

On November 12, 2020, Hubert Robbins sells 100 shares of Loser Inc. for $120 per share. He had purchased these shares several years ago at $220 per share. On November 18, 2020, he acquires 80 shares of Loser Inc. for $100 per share. On December 22, 2020, he acquires 50 shares of Loser Inc. at $80 per share. What is the adjusted cost base of the 130 shares that he holds after the December 22, 2020 purchase?

Accepted Answer

The answer of On November 12, 2020, Hubert Robbins sells...

Question 12

To be an eligible corporation for purposes of the deferral provisions on small business investments, more than 50 percent of the fair market value of its assets must be used to produce active business income in Canada.

Accepted Answer

The answer of To be an eligible corporation for purposes...

Question 13

A superficial loss occurs when, in the 30 days following the disposition that resulted in the loss, an identical asset is acquired.

Accepted Answer

This is the definition of a superficial loss according to the Canadian Income Tax Act.

Question 14

Mr. Schmidt purchased 250 shares of Doss Limited on February 1 of the current year for $20 per share. On May 1 of the current year, he purchased 100 more shares for $25 per share. On June 20 of the current year, Mr. Schmidt sells 100 shares for $15 per share. His allowable capital loss on June 20 is $643.

Accepted Answer

To determine the allowable capital loss, we need to calculate the adjusted cost base (ACB) of the shares sold.

The ACB of the 100 shares sold would be calculated as follows:

ACB = (250 shares x $20 per share) + (100 shares x $25 per share) 
ACB = $5,000 + $2,500 
ACB = $7,500

Since Mr. Schmidt sold the 100 shares for $15 per share, the total proceeds from the sale would be:

$15 per share x 100 shares = $1,500

To calculate the capital loss, we need to subtract the proceeds from the ACB:

Capital loss = ACB - proceeds 
Capital loss = $7,500 - $1,500 
Capital loss = $6,000

Therefore, the allowable capital loss on June 20 would be $6,000, not $643.

Question 15

When there is a change in use, there will be a deemed disposition/reacquisition.

Accepted Answer

When there is a change in use of an asset (for example, from personal use to rental use), the Income Tax Act in Canada considers this to be a deemed disposition and reacquisition of the asset, which may result in tax consequences.

Question 16

When there is an involuntary disposition of a depreciable asset, any resulting capital gain can be eliminated if the asset is replaced by an asset of equal or greater value, no later than the end of the second taxation year following the disposition.

Accepted Answer

This is known as the capital gains rollover rule and is allowed under the Income Tax Act. It allows individuals and businesses to defer paying taxes on capital gains if the proceeds from the sale of a depreciable asset are reinvested in a replacement asset within the specified timeframe.

Question 17

One of the reasons for the favourable tax treatment of capital gains is that the amounts received often have to be reinvested in the business in order to maintain its productive capacity.

Accepted Answer

Capital gains, which refer to profits made from the sale of assets such as stocks and real estate, are often reinvested back into the business to maintain or grow its operations. As such, tax policies may treat capital gains more favourably as a way to incentivize investment and economic growth.

Question 18

When there is a disposition of a capital asset and not all of the proceeds of disposition are collected at the time of disposition, a reserve can be deducted. In the year of the disposition, the reserve cannot be less than 80 percent of the total gain.

Accepted Answer

A reserve can indeed be deducted when not all proceeds from the disposition of a capital asset are collected at the time of disposition, but the statement about the reserve not being less than 80 percent of the total gain in the year of disposition is incorrect. The actual amount of the reserve that can be claimed is determined by specific formulas in the tax legislation, which consider the amount of proceeds not yet received and the number of years over which the proceeds are to be received, rather than a fixed percentage of the total gain.

Question 19

Carine purchased a piece of land with her inheritance. She was planning to open a mini-golf course and put in a zip-line course. Carine had been laid off for a year and could not find work as a golf pro. After spending some time researching mini-golf and zip line course designs, she received a job offer which she decided to take. She has received an offer to purchase the land at a significant gain. Which of the following statements is correct?

Accepted Answer

Since Carine's primary intent was to use the land in her business, the gain is considered as capital gain. This is because the land was held as a capital asset with the intention of using it in the business. Additionally, the property taxes on the land may be deductible if Carine elected to capitalize the costs of the land during the period it was held for business use. However, this does not affect the characterization of the gain as a capital gain.

Question 20

The term proceeds of disposition can be used in a number of situations. Indicate which of the following would not be considered proceeds of disposition for the PD Company.

Accepted Answer

Amounts paid to PD Company on the sale of inventories would not be considered proceeds of disposition as it is a regular part of their business and not a disposal of property. The other options involve a disposition of property, whether through destruction, theft, expropriation, or sale of a physical asset.

Quiz 8: Capital Gains and Capital Losses